Access to overseas customers, investment and knowledge can increase a country's production of goods and services.
A food producer wins orders from overseas supermarkets and expands its local factory to supply them. Foreign demand gives it a reason to produce more than its home market alone would buy.
Economic growth means an increase in a country's output of goods and services after allowing for price changes. Real gross domestic product, or real GDP, is a common measure of this domestic output: production within the country. A larger money value caused only by higher prices does not establish growth in real output. An index can set one year's real output to 100; a later value of 105 means 5% more output, not $105.
Exports, or sales of goods and services abroad, can bring demand from larger markets. Foreign investment puts money or other resources from abroad into businesses or projects, potentially adding factories, equipment or services. Imports are goods and services bought from other countries; imported technology and knowledge can improve production. These links can contribute to growth, but firms still need customers and the ability to supply them.
Growth describes the economy as a whole. A sector is a part of it, such as manufacturing. Some sectors or households may gain more than others, while some may lose work or income. Higher national output does not prove that every person's wages or living standards improved.
Real pay is pay adjusted for price changes, allowing comparison of purchasing power: what it can buy. Average pay is total pay divided by the number of workers. For the same group, a falling average real pay means they cannot all have gained; it does not show that every person's pay fell.
Worked example: Producing for a larger market
A Singapore sauce producer has spare factory space. After securing regular orders from overseas supermarkets, it installs more equipment and produces additional sauces locally. The new orders are for extra quantities, not just higher prices.
- The overseas market adds demand beyond local customers. The producer responds by increasing actual production.
- The equipment helps it meet that demand. The extra local production can contribute to the country's real output.
- This shows one contribution to growth, not the performance of the entire economy. National growth also depends on what happens elsewhere.
- The example does not establish how the additional income is shared among owners, workers or other households.
Watch out for this
Higher national GDP means every worker received a pay rise.
Real GDP measures total output, not each person's income. Check employment, wages and the distribution of gains separately.
Check your understanding
An economy produces exactly the same quantities of goods and services as last year, but prices rise. Its output has a higher money value. What can be concluded?
- Real output definitely grew because the money value is higher.
- Every person's purchasing power increased.
- The higher money value alone does not establish economic growth in real terms.